To paraphrase the Blue Öyster Cult, “Fear not the Conical.”
Tapering, the term used to describe the settlement of the Federal Reserve’s bond purchases, was the big topic of conversation last week – even though we all knew that quantitative easing lives on borrowed time. Still, we read The Wall Street Journal article that brings everyone together the hawkish Fedspeak one place last Monday and waited minutes from the Fed’s July meeting on Wednesday, even though we all had a pretty good idea of what they wanted to say.
It never ceases to amaze us how the market can respond to a non-surprise. But it responded. That
fell 1% to 4424.11 in the past week, with the worst fall falling on Wednesday, while
Dow Jones industrial average
fell 395.30 points or 1.11% to 35,120.08, and
decreased 1.3% to 14,635.81.
These losses come quite briefly to a complete fit of rage, and there seems to be no reason to really expect a repeat of 2013, in which Ben Bernanke certainly shocked the market when he first discussed the subject. This time, everyone knows the cone is coming — though Rob Kaplan, the Hawkish president of the Dallas Fed, muddled things up a bit, saying he would reconsider his call if the Covid-19 Delta variant showed signs of slowing economic growth.
But more importantly, the original conical tantrum was nowhere near as bad as its reputation suggests. Yes, equities fell 5.8% from May 22 to June 24, 2013, but those losses were quickly repaid, notes BMO Capital Markets strategist Brian Belski. The stock market also does not need QE to make gains, although gains have been greater during periods when the Fed buys bonds than when it is not.
“As such, the so-called conical tantrum in 2013 actually represented a buying opportunity in U.S. stocks,” Belski explains.
Of course, there are plenty of things to be afraid of, though downsizing is not one of them. That failed exit from Afghanistanalthough it is unlikely to have an economic impact, it could complicate the passage of a stimulus package in Washington. The stock market, meanwhile, appears to be supported by fewer and fewer small-cap stocks
fell 4% in the past week – just the latest sign that there is plenty of weakness below the surface. Economic data also seems to have slowed down more than just a bit housing is starting to fall and retail sales are suffering a larger decline than expected, perhaps due to The spread of the Delta variant.
Still, other data has held up well with an unexpected increase from month to month in Industrial production and unemployment claims when a pandemic era low. The latter in particular suggests that the economy remains strong enough for the end of QE to begin. “If labor market data holds, the Fed will decline this year,” writes MKM Partners chief economist Michael Darda.
We are looking for more news about the timing on August 27, when Fed Chairman Jerome Powell speaks at the Kansas City Fed’s Jackson Hole conference, which is now to be held online. But like it or not, downsizing is coming.
And when it does, we’ll see how much of it is already priced.
Write to Ben Levisohn at Ben.Levisohn@barrons.com
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